A research submitted in partial fulfillment of the requirement for the degree of Master of Business Administration, School of Management

Research Studies Project Report (M.B.A.) - Asian Institute of Technology, 1996

A large number of developing countries have accepted foreign direct investment (FDI) as part of their development strategies. In fact, their concern is how to attract FDI and how to benefit from it. Taiwan with its outstanding economic performance and an open attitude towards FDI is an ideal country for which to study the relationship of FDI to economic development. Many policies implemented by Taiwan could be applied to other developing countries. This study proposes an analytical framework to explore the relationship between FDI and economic development. This framework combined stages-of-growth model and benefit-cost analysis to a general analytical framework to access the pattern, role and impact of FDI. It's helpful for formation FDI policies over the very stage of economic development. In the case of Taiwan, FDI never become a major source of capital in Taiwan, more than anything else, FDI contributed to Taiwan's economy by introducing new technology. That is with respect to improvement of the efficiency of resource allocation in both the static and the dynamic. The lessons from Taiwan can be concluded as: 1) A developing country adopting export-oriented strategy has a less protected domestic economic environment so that foreign firms are forced to use resources in most appropriate way. 2) To obtain the maximum benefits from FDI, the host country must implement policies to maximize the linkage effects created by foreign firms. 3) Promoting the efficiency and absorptive capability of local firms for foreign technology and management skills will be able to gain more benefit from FDI.